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The format is a lossy compression format. This means that each time something is compressed with it, some information is lost. This information can not be recovered. When encoding to MP3 (converting some audio data to it), the encoder is smart. The human ear can not hear certain sounds if they are masked by other sounds. This means that when encoding certain sound samples, some sounds can be left out (as they will not be heard). This makes it possible to compress audio by a factor of about 5, without noticeable change to the sound of the music.

Many people like to use MP3 files to copy music so they can listen to it on their computer. Record companies do not like it when people use the Internet to share these MP3 files with each other. They think it is a violation of their copyright. The record industries have a trade group called the RIAA that has taken people to court for sharing music. An Internet website called Napster was shut down because of this. Napster has since re-opened, but does not let people share MP3 files anymore.

Other formats for audio compression are Ogg Vorbis, and FLAC. Ogg Vorbis is very similar to MP3, although it has many improvements. FLAC is a lossless compression (meaning no information is lost), and gets compression rates of 2-3.

In 1980s, Dieter Seitzer started the development of a code for audio format of high-quality. Together with his team at the German Fraunhofer Institut situated in Erlangen, the professor had the idea to create code with a low bit-rate. The German institute received the patent for MP3 in 1989. MP3 was then passed to the International Organisation for Standardisation. In the same year the MP3 was included into MPEG-1 specification. (MPEG means "Moving Picture Experts Group").

The first player to be able to read the MP3 format was designed by the same Fraunhofer Institute in 1990's. A Croatian student named Tomislav Uzelac developed AMP MP3 Playback Engine in 1997. It represented the first device that could be called MP3 player. After the player appeared on the Internet, two students named Justin Frankel and Dmitry Boldyrev transformed it into Winamp. They took the engine of the original player and added the interface of the famous Windows.[source?]

When Winamp was launched into the net for free use it became successful at once. This way began the era of free music download. Soon various programmers started creating additional features for the MP3 player. Very often they created new encoders, rippers (software for transforming audio tracks into MP3 files) and players.

Because there is no need to pay licensing fees in order to build the player, today many software MP3 players are free. Some companies claim to have patents covering the MP3 format, but the validity of these patents is questionable because the format specification was published more than 20 years ago, meaning that any relevant patents would have expired. The most famous MP3 players are Winamp, Sonique, iTunes and MusicMatch. The main feature of an MP3 player is to turn the MP3 files into standard audio form and then send them to the soundcard of the computer. The soundcard then outputs the files into speaker so the user can hear them. Every MP3 player interprets music differently, though each one of them uses the same code for playing the MP3 files. There are also stand-alone (without a computer) MP3 players. These may be portable, or they may be built-into a stereo system or car stereo.

When compressing, for each frame (a small section of audio), the encoder first splits the audio into 32 different parts using a filter bank, similar to MP2. The audio is then split further into either 192 or 576 different parts (depending on the complexity of the audio being compressed - more complex audio is split into fewer parts) using the modified discrete cosine transform. The MP3 encoder then removes parts that it thinks the human ear can't hear. The remaining parts are then compressed using Huffman coding. Decompression does these same steps (except removal of parts of the audio) in reverse.